In the search for the optimal portfolio, one of the things investors examine is long-term trends. The “Decade trends” series takes a close look at examples of investment themes that have dominated markets over the course of a decade.
A decade is a long time: the economy can through several business cycles, new companies are founded and old ones disappear. Depending on how the economy and society develop, some companies in certain sectors enjoy a particularly high level of success and attract increased attention over the course of a decade. As a result of this phenomenon, investment themes emerge that remain imprinted on the minds of investors as major “decade trends”.
But the major trends of one decade rarely carry over into the following decade. Instead, after a period of exaggeration they die down significantly, at the very least. It can therefore be said that every decade has its own clear investment themes.
At the outset, the shares of companies that are part of an investment trend are under the radar of most market participants. This is because such long-term changes are at first often gradual. It is at this time that the greatest upwards potential for share prices exists, although this is also associated with a certain amount of risk – after all, it is not yet possible to predict if or when the trend will truly have a breakthrough.
Netscape Communications released its Navigator internet browser in 1994, the same year it was founded. It quickly became the market leader and the company became a symbol for the meteoric rise of the NASDAQ in the 1990s: following its IPO in 1995, Netscape’s share price rose from 28 to over 80 US dollars within just weeks.
The dominance of Navigator, which at certain points in time reached a market share of 85 percent, went into a dramatic decline in 1996. And yet: during what was still a general internet boom, AOL nonetheless acquired Netscape in 1998 to the tune of 4.2 billion US dollars. When the internet bubble around the NASDAQ companies burst a few years later, it was no longer something Netscape founder Marc Andreessen had to concern himself with.
It takes a certain amount of time for trends to stand out from the masses on a fundamental basis. But when they do, this usually gives rise a significant increase in share prices, and these shares come into greater focus for a broader group of investors. At that point, the trends become more and more obvious, until they can hardly be escaped – often, even the media reports on them frequently. As a result, a public perception emerges that these companies are infallible and are always a good investment. But it is this very consensus that marks “the beginning of the end”.
The perception and behavioral effects of market participants come into play at the latest during the exaggeration phase. One reason for this is because people tend to expect what they know from the recent past to happen in the future (recency bias). They then unconsciously extrapolate these expectations for the future (extrapolation bias). This leads to an increasingly one-sided and extreme scenario in which developments can become detached from reality and markets tend to exaggerate irrationally. When exactly this happens is often only apparent in retrospect – such as in the case of the internet bubble in the early 2000s. It often takes a crash to put an end to the euphoria by bringing valuations to a level that is realistic in the long term.
Long-term investment themes are attractive for investors because they offer strong return potential. However, if these trends turn into a hype due to ever-increasing valuations and expectations, they become dangerous, as the risk that the trend is coming to an end and investors will focus their attention on new themes increases.
In our “Decade series”, we will explore this pattern using some fascinating examples: in September, we will start with the rise of oil stocks during the 2000s.